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Scope 4: do we need a new category of emissions to better address corporate climate action?

CDSB's Technical Working Group member, Jarlath Molloy, investigates whether the progress being made by companies to reduce their greenhouse (GHG) emissions has been overlooked to date and what a solution could be.

With thousands of people joining the Friday School Strike for Climate marches, the Extinction Rebellion initiative gaining momentum and renewed priority among the public, it feels like there is growing appetite for climate change mitigation. Greta Thunberg’s principled and simple demand that policymakers listen to what scientists are saying about climate change has certainly shifted the narrative. Governments did take action at COP21, resetting their ambition to limit climate change to 1.5°C as part of the Paris Agreement, but questions do remain. How we track the progress being made by companies to reduce their greenhouse (GHG) emissions has been overlooked to date and is key to underpinning the ambition of the Paris Agreement.

While European policy on climate change mitigation and adaptation is generally regarded as quite progressive, it is not clear what actions are to be adopted to deliver that ambition. Many of these actions depend on national and local governments providing direction and resources. Greater emphasis is also needed on the role of the companies that emit the emissions, and how these companies are responding with their own actions to reduce them.

Just 100 companies are responsible for 71% of global emissions. Think about that for a minute; not countries, not States, not regions – individual companies we buy goods and services from and often invest our pensions in.

A growing number of countries have, or are in the process of, adopting net zero emissions targets for 2050, which will require changes to our lifestyles and the purchasing decisions we make. But what has been the response from companies progress in supporting these net zero targets?

While it can be difficult to collate and aggregate improved performance at a global level, there are encouraging trends that companies are individually reducing the emissions intensity of their products and services, as well as their net total emissions. Ultimately however, the solution for global aggregation lies in borrowing the approach (e.g. consistency and comparability, etc.) from the accounting world to develop a standardised way of recording and reporting emissions. To do anything less wouldn’t be credible. You might argue that, as a result, accountants are going to save the world.

Over 30 countries have mandatory requirements in place for companies to report their emissions annually, while over 8,400 large companies voluntarily report detailed information on their environmental performance to CDP. This progress would never have been possible were it not for a group of large companies and non-governmental organisations who joined forces to launch standardised methods for emissions accounting in 2001, known as the GHG Protocol. This measures not only direct emissions but also the emissions that companies have influence over e.g. as a result of their services and in supply chains.

Under the GHG Protocol, companies report not just their own direct emissions, but what emissions have been produced as a result of the products or services they provide, and by themselves on behalf of other companies. These emissions fall into three categories:

Scope 1: direct emissions from a company’s owned or controlled sources, e.g. from the natural gas boilers used to heat buildings, the gasses used in refrigeration to cool server rooms, or the fuel burnt in company vehicles.

Scope 2: indirect emissions from the generation of purchased energy. This could be low if a company opts for a renewable electricity contract, or much higher if a company opts for a standard contract which relies on coal fired power stations.

Scope 3: all other indirect emissions that occur, including those of a company’s suppliers (upstream) and customers (downstream).

The task of calculating a company’s main direct and indirect emissions is no more complicated than it is to manage a financial audit, with the right systems and experience. Other indirect emissions can be trickier to estimate though because they’re often beyond the control of the company.

According to the GHG Protocol, the emissions used as a result of the use of a company’s product or service (by the customer) should be reported as scope 3 category 11. But how and where do company’s pledges against the Paris Agreement ambition to limit climate change to 1.5°C fit within the GHG Protocol?

If the company is able to improve the efficiency of their product or service, they indirectly affect the emissions of the user of that product or service. However, that saving can be obscured by increased sales of that product or service, leading to that company’s scope 3 category 11 emissions increasing.

To take an example, an electric toaster manufacturer could make a more efficient toaster, but still see the emissions from use of their product rise and outstrip the efficiencies made due to an increase in popularity and sales.The GHG Protocol doesn’t yet address this gap in emissions.

Scope 4

One option for bridging this emissions gap is to take the GHG Protocol principles and adopt the term scope 4, also known as avoided emissions, ahead of agreed guidance and standards.

Using the toaster analogy, we know that the manufacturer can reduce the average CO2 per slice of toast, however, the increase in total scope 3 category 11 emissions as a result of increasing sales or appetite is beyond its control. Therefore, its total scope 3 category 11 emissions from use of this toaster might increase, as a result of increased sales. The company would nonetheless want to track its progress in avoiding emissions which would have otherwise occurred if it had not invested in R&D to improve its efficiency. These avoided CO2 emissions could therefore be tracked and reported as scope 4 emissions, but of course not be used to deduct or offset their combined scope 1, 2 and 3 emissions. In other words, as a result of optimising the efficiency of the toaster, CO­2 emissions from making toast would have been higher were it not for its innovations in product design and manufacture.

We need a mechanism to help companies capture and track commitments linked to the Paris Agreement. While not a perfect solution, the concept of scope 4 (or avoided) emissions does reconcile the GHG Protocol principles with decisions that are actually being taken by company Boards, with the actions that are expected from companies to reduce CO2 emissions. And of equal importance is how that information is prepared and reported, for example by using the CDSB Framework to incorporate this information in mainstream reports so that investors have the decision-useful information they need to allocate capital towards projects and activities that align with a sustainable future and the ambition of the Paris Agreement.

This blog was submitted by our Technical Working Group member, Jarlath Molloy. The views expressed in this article are those of the author alone and not the Climate Disclosure Standards Board (CDSB).